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Stampede into Bonds 12/1/2011

by Sergio Mariaca on Dec 1, 2011 12:55:00 AM |Share:

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U.S. Treasury debt had its best quarter since the first quarter of 2008. Treasuries maturing in 10 years or more returned 23% during the quarter, according to Barclay’s Capital index data. Not since 1995 have investors done so well owning longer-dated U.S. government debt. However, according to the Fed economists, expectations for interest rates, growth and inflation indicates 10-year notes are the most overvalued on record. (Source: WSJ, October 1, 2011 – Stocks Log Worst Quarter)

Yields on the U.S. Treasury 10-year note fell to 1.71%, the lowest yield since the 1940s. With overall inflation running around 3.6%, that indicates that many investors were effectively accepting a loss. And, in the case of U.S. Treasury bills, investors at times throughout the quarter bought securities that offered no yield at all. Essentially, investors were parking money with the U.S. Treasury, at least expecting to get back the same amount in 3 months. For many investors, all that mattered was certainty. (Source: WSJ, October 3, 2011 – Spooked Investors)

The Federal Reserve has promised to keep short-term rates low for another 2 years and it keeps the rate on 10-year bonds down by printing money and using that to buy the bonds. Artificially low interest rates may stimulate people to buy homes and use their credit cards, but they have the opposite effect on people with money in the bank. For example, widows used to live off the interest on their bank deposits. How can you do that when the yield is only about 0%? Many investors have their money in Treasury bonds because they are considered “safe.” They are safe only in the sense that you know what is going to happen. You know they’re going to make you slightly poorer.

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